Report: State Pension Plans Face Accounting Wake-Up Call

Decades of overstating expected returns while underfunding pensions is catching up fast to state retirement plans — and at the worst possible moment.

New rules to be approved today by a private accounting body, the Governmental Accounting Standards Board, could increase pension costs by a whopping 19 percent with the stroke of a pen.

Liabilities, what the funds must pay out to retirees, would increase at 126 state and city funds by an aggregate $600 billion, reports The Wall Street Journal, citing research by Boston College. That data is based on 2010 financial results.

In effect, rather than claiming to be 76 percent funded, state funds would have to admit that they have just 57 percent of the money in hand, if the rules are enacted. The actual market return reflected 67 percent funding in 2010, the college reports.

The changes would take place in 2013, although borrowing costs would rise much sooner for states deep in the red on pension and other budget funding.

States and cities have been discounting their liabilities by 8 percent, a wild presumption in a time when bonds return less than 2 percent and the stock market has been virtually running in place.

It’s clear that the pension funds are far behind on their expected results, a situation that would be made worse if standards are tightened and they are forced to make more realistic assumptions about returns, known as “actuarial assets.”

“The 2008 financial crisis caused an enormous decline in market assets and an 18-percentage point drop in funding, whereas actuarial assets only declined by 5 percentage points," the researchers wrote in the study, published by the college’s Center for Retirement Research.

“But the bottom line is that the aggregate funded ratio using market assets was only 67 percent in 2010 compared to 76 percent using actuarial assets, so policymakers should be prepared for a sharp decline in funding if GASB introduces this change.”

The retirement funds are running behind even as the several states face separate, huge general budget shortfalls.

A new report from the Illinois auditor shows the state remains $43.8 billion the red, followed by New Jersey at $33.4 billion, Massachusetts at $22.8 billion, Connecticut at $14 billion and California at $10.5 billion.

Texas is the standout winner in the auditor’s report, running a $97.3 billion surplus in 2011.